Key pension changes from the 2023 Budget

On 15 March 2023, as part of his Budget Statement, Chancellor of the Exchequer, Jeremy Hunt, announced a series of proposed changes to pension taxes, which are:

• the lifetime allowance (LTA) charge will not apply from 6 April 2023 and the LTA will be removed entirely in due course,
• Maximum tax-free cash to be frozen at £268,275,
• the pension annual allowance will increase from £40,000 to £60,000,
• the money purchase annual allowance (MPAA) will increase from £4,000 to £10,000,
• the tapered annual allowance will be updated.

Lifetime allowance changes

The lifetime allowance (LTA) is the limit on the total value of pension savings you can build up through your lifetime without triggering an extra tax charge. If your pension savings are worth more than this limit, you would need to pay a tax charge of up to 55% on anything over the lifetime allowance when you first start taking money from your pension.

The lifetime allowance is currently £1,073,100 and was planned to be frozen at that level until 2026. The Chancellor announced that the lifetime allowance will, in due course, be removed completely, and no one breaching the current limit when starting to take money from their pension from 6 April 2023 will face a lifetime allowance tax charge.

Tax free lump sum changes

The maximum amount of tax-free cash (known as the pension commencement lump sum or PCLS) will be kept at the current level of £268,275 from 6 April 2023 and will be frozen going forward. However, individuals with a protected right to take a higher amount of tax-free cash will continue to be able to do so. Where higher lump sums are paid, these will be taxed at the individual’s marginal rate, instead of at 55%, from 6 April 2023.

Pension annual allowance changes

The pension annual allowance is the total amount you can save into your pension plans each year before you have to pay an additional tax charge. This includes payments from you, your employer and any third party. For most people, it was either £40,000 or the amount of your total earnings – whichever is lower. It will rise to a maximum of £60,000 on 6 April 2023.

Money purchase annual allowance changes

If you start to take money from any defined contribution (DC) pension, then the amount that can be contributed to your DC pension will usually reduce from £40,000 to £4,000. This is known as the money purchase annual allowance (MPAA).

The Chancellor announced that this will go up from £4,000 to £10,000.

Tapered annual allowance changes

If you’re a higher earner, then you might have been impacted by an allowance known as the tapered annual allowance. This gradually reduces the amount you can save into your pension plan each tax year depending on your earnings. There was a lower limit of £4,000 in place, but this lower limit will be increased to £10,000 in the new tax year.

Expert help and guidance

We will be updating our retirement communications material and Pension Calculator to reflect these changes.

If you have questions about how any of the changes from today’s Budget will impact you, you should speak to a financial adviser. They’ll be able to tell you exactly what the changes mean for you based on your personal circumstances. Find out about the expert help available to you on our website at Where to go for financial advice.

This information is a summary based on our understanding of the current law and regulatory practice. It does not constitute financial advice and you should seek your own independent financial advice before making any decisions in relation to this information. Your BTPS benefits are always subject to the Scheme Rules and relevant legislation. If there’s any difference between the information provided here and the Scheme Rules and legislation, the Scheme Rules and legislation will override the former. Please be aware that the law might change again in the future.